Reduce Your Car Payments in Chapter 7

Like a cramdown in a Chapter 13 case, your car payments may be able to be reduced with a redemption in a Chapter 7 bankruptcy case. In a redemption, the Debtor pays the lender off with a payment equal to the value of the car. The Debtor is then no longer obligated to pay the lender the remaining balance of the car loan. What a deal! Well, maybe. For a redemption to work, the balance on the car loan needs to be significantly higher than the value of the car. Usually, several thousands of dollars. Most Debtors don't have thousands of dollars lying around. So, they redeem the car by obtaining a redemption loan from a redemption loan company. These are usually higher interest loans. But, if the numbers work, the Debtor can potentially save thousands of dollars over the life of the loan even if paying a higher interest rate because the redemption lowers the principal of the loan.

A redemption is achieved by filing a Motion to Redeem with the bankuptcy court. In the Motion the Debtor proposes a value of the car. If the lender agrees with the value of the car, then the redemption loan company will send payment to the lender and that original lender is now out of the picture. The Debtor will then have a new car loan, but now it will be with the redemption loan company and often with lower payments over a shorter term. If the lender does not agree with the value set forth in the Motion to Redeem, then some negotiations may go on to resolve that issue. If the parties can't agree on the value of the vehicle, then ultimately the bankruptcy judge will decide upon the value of the car. But it rarely gets to that point.

Redemptions have recently become more challenging for Debtors due to the skyrocketing values of used cars. But, used cars seem to be coming back down to earth, and if that trend continues, redemptions could become common again in the future.

Give us a call if you would like to learn more about redemptions and whether one would be beneficial for you.

Reduce Your Car Payments in Chapter 13

In a Chapter 13 bankruptcy a Debtor may be able to reduce the principal and interest that is paid on a car loan through a cramdown. In order to reduce the principal that a Debtor pays on a car loan, the car loan debt must have been incurred more than 910 days (approximately 2 1/2 years) before the bankruptcy case was filed. If that is the case, then the Debtor is only required to pay the value of the car at the time of the filing of the bankruptcy case over the life of the Chapter 13 Plan (from 3 to 5 years) with an interest rate that is currently about 5% (plus the trustee's fee). To determine the value of the vehicle one could look at the N.A.D.A.'s website and the value that is usually agreed to between the Debtor and the car lender is somewhere between the trade-in and retail value. If repairs are needed to put the vehicle into proper working order, an estimate for those repairs should be obtained in order to lower the value of the vehicle accordingly. It is not uncommon for a cramdown to save the Debtor thousands of dollars over the life of the Chapter 13 Plan. There is a similar mechanism in Chapter 7 for reducing the payoff of a car loan to the current value of the vehicle. In a Chapter 7 it is called a redemption. We will provide more details about redemptions in a subsequent blog post. For a more complete explanation of cramdowns and redemptions, give us a call at (608) 718-0497.

Motor Vehicles in Bankruptcy

One of the most common questions I am asked by Debtors is, "Can I keep my car in a bankruptcy?" The answer is, "If you want to keep your car, you can almost always keep your car." One scenario in which you may not be able to keep your car would occur when you have more equity in your car than you can exempt. In Wisconsin, if you have $4,000 or less in equity in your vehicle you can usually exempt it. If you have more equity than that, then, it depends. The most equity you can possibly exempt in a vehicle in Wisconsin is $17,900. How is a car loan treated in a bankruptcy? There are four options in Chapter 7: reaffirmation; ride-through; redemption; and surrender. In Chapter 13, depending on the circumstances, you can: continue to pay your loan outside the Plan; pay the loan off in your Plan over a longer period of time and possibly at a lower interest rate; pay off the loan with a principal reduced to the value of the vehicle ("cramdown"); surrender the vehicle; or a combination of the afore-mentioned. I will be describing those options in more detail in subsequent blog entries. For an explanation of what exemptions are and how they work, give us a call.